The march of technology challenges humans to keep up, leading to difficult conversations for the many technology firms clamoring for a slice of federal IT modernization spend

In 2018 U.S. federal government policy and budget aligned to amplify excitement around the long-promised application of private sector IT innovations to public sector missions. We began to see action as government policies such as the President’s Management Agenda and National Defense Strategy combined with a bipartisan budget agreement to send a clear message that government agencies need to embrace cloud operating models and explore new technologies to reduce costs, move faster and serve constituents more effectively.

In a prevailing movement TBR calls Wallet vs. Will, the federal market’s pursuit of commercial IT represents a fundamental shift from traditional procurement models predicated on bespoke, costly and difficult-to-replace proprietary technology to a more agile model leveraging configurable off-the-shelf solutions enabled by open standards. In the old model, prohibitive cost was the primary impediment to moving technology forward, driving top-down commercialization models out from the Pentagon, or the wallet holder. In the emerging model, the axis has flipped as technology is no longer the problem but rather the will of the humans interacting with technology has become the main obstacle to keeping up with technological advancement.

As technology moves forward at breakneck pace, government policy and regulations will struggle to keep up. Law as the codification of an agreed-to set of ethical standards remains woefully behind as society struggles with the implications of technology development on myriad issues, from a citizen’s right to privacy to warfighting. In 2019 familiar market trends such as transformative M&A in the IT industry broadly and in the federal services market specifically will continue to reshape the market and create new disruptions. However, we believe that the continued ethical debate around emerging technologies, as much as who holds the innovative IP around those technologies, will help shape the competitive landscape in the years ahead.

IBM’s assets combined with Red Hat’s business monetization models are a good bet to provide a scaled, secure and trusted platform, if IBM can adjust internally and convince its clients to do the same.

The market splash

When a blue-chip bellwether company buys a firm that broke the lock on proprietary operating system dominance something big is afoot. IBM’s market luster has faded somewhat, and the financial sharks are circling with calls for CEO Virginia Rometty’s head and for IBM to be broken up and sold off to warm the cockles of institutional investors’ hearts, who cannot see the market implications beyond 90 days. IBM has been here before, in the late 1980s when Digital Equipment Corporation had a higher market valuation than IBM based on a single architecture and operating system as opposed to IBM’s six or so disparate computing architectures and operating systems. IBM’s first effort to course correct with the 9370 minicomputer was essentially dead on arrival, but its second shot, the AS/400, lives on in server closets to this day as the iSeries.

But this new challenge is different, and IBM knows it. Its executives talk about how “the axis has flipped.” At TBR, we talk of the Business of One as others label this moment as Industrial 4.0. The core revolves around cheap compute. Moore’s law has been the fundamental economic axiom driving the rapid rise and fall of technology vendors for at least 60 years, though some say its effects are waning. Despite the undeniable shift, innovations around cheaper and cheaper compute, storage and networking sources will continue in ways fascinating to fathom, especially as quantum computing nears commercial viability. At once scale means nothing and everything in this Business of One era.

Scale: Vital and trivial at the same time

Scale means nothing amid the development of new ideas.

Scale means everything when it comes time to ensure business commerce can leverage the new ideas in ways that protect brand, customer privacy and regulatory compliance.

IBM understands this as well as, if not better than, any of its competitors. The challenge for IBM is the same one faced by Satya Nadella when he took over Microsoft: how to change a deeply ingrained and highly successful corporate culture to align to these new, seemingly contradictory market realities. A lot of economists get lost in the buzz of hypergrowth for scaled public cloud revenue. Public cloud, at its core, is nothing but a commodity utility offering. It has never been the IBM play, and it ought not to become its play now. The company’s domain is enterprise IT, not easy storage of family photos or digital music. Amazon, Azure and Google (“Amazurgle”), and emerging regional rivals, can meet these demands, especially when such companies derive the bulk of their revenue elsewhere through advertising or e-commerce.

What IBM has to learn is how to compensate the management layers on companywide execution rather than on siloed execution. You cannot hold firm on razor sales when to lose that sale means risking a lifetime of highly profitable razor blade sales.

The technology assets IBM stands to gain in the acquisition are well documented, particularly in a recent commentary by TBR Senior Analyst Cassandra Mooshian. But TBR has covered IBM and Red Hat for years, and after one particular Red Hat analyst day, TBR summed up Red Hat CEO Jim Whitehurst’s business strategy as “deja vu all over again.” Essentially Red Hat aimed, and is still aiming, to do in the PaaS layer what it did in the enterprise operating system layer. Red Hat’s success with this strategy would prove a boon to IBM, and IBM’s long working history with open-source communities should allay many (but obviously not all) of the concerns within those communities around the business following the proposed acquisition.